Uncertainty among British consumers and ailing business confidence in the face
of the eurozone debt crisis will hit UK growth this year, Ernst & Young
has warned.

The accountancy firm's much watched Item Club survey has lowered its forecast for UK growth for the second time this year, predicting a rise in GDP of just 1.4pc against a previous reading of 1.8pc. Item said GDP would rise 2.2pc in 2012 – against a previous forecast of 2.3pc – and by 2.5pc in 2013.

The lower forecasts come ahead of the publication this Wednesday of minutes from the Bank of England's latest Monetary Policy Committee meeting and will strengthen views that a rise in interest rates remains some way off.

"The UK economy has hit a critical juncture. The risks to the world economy and the Eurozone are plain to see, starting with the Greek default which hangs like the sword of Damocles over Europe, threatening a domino effect on Portugal and Ireland, followed perhaps by Spain and Italy," said Peter Spencer, chief economic advisor to the Item Club.

Item said it was predicting a rise in business investment of 8pc this year and by 12pc in 2012 but said those levels remained well off the peaks. "The uncertainty about Greece and the EU periphery will continue to act as a damper on business investment in the UK, long held up as one of the torches that would light the way to recovery," Mr Spencer added.

He pointed out that UK inflation running at 4.2pc was also eroding consumers' spending power and directly affecting economic growth.

"The situation remains pretty dismal for most consumers who, according to official statistics, have been plunged back into recession," the report said. "With inflation set to remain at above 4pc this year and earnings growth subdued, Item sees real household disposable incomes falling by 1.4pc this year, following a decline of 0.8pc in 2010 – the first back-to-back declines in household income since 1976."

The report also forecast that house prices would continue to fall "well into next year", down 6pc from their 2010 peaks.

Despite the gloomy outlook, Item said the long-term prognosis was more upbeat for business. "Corporate balance sheets are healthy and exports should pick up again quite quickly once current uncertainties in Europe are resolved," Mr Spencer said.

He added that economic signals remained too mixed for the Government to consider a "plan B" to its austerity cuts programme.